Tag: Ind AS 27 separate financial statements

Ind AS 27, “Separate Financial Statements,” specifies the accounting and disclosure requirements for separate financial statements. Separate financial statements are those presented by an entity in which the entity could elect to account for its investments in subsidiaries, joint ventures, and associates either at cost, in accordance with Ind AS 109, “Financial Instruments,” or using the equity method as described in Ind AS 28, “Investments in Associates and Joint Ventures.” The standard aims to provide guidance on how an entity should report in its own financial statements the investments it holds in other entities, distinguishing this reporting from the consolidated financial statements, which present financial information about the group as a single economic entity.

Key Requirements of Ind AS 27:

1. Objective:

The primary objective is to prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures, and associates when an entity prepares separate financial statements.

2. Scope:

Applies to entities that prepare separate financial statements in addition to consolidated financial statements or in the case where an entity is exempt from consolidation or does not have such investments.

3. Investment Accounting:

In separate financial statements, investments in subsidiaries, joint ventures, and associates can be accounted for either:

• At cost (subject to impairment)
• In accordance with Ind AS 109 (at fair value through profit or loss or through other comprehensive income)
• Using the equity method, as described in Ind AS 28 (only if the entity is a venture capital organization, a mutual fund, unit trust, or similar entity and upon initial recognition it designates its investments in such a manner)

4. Disclosure:

The standard requires disclosures that will enable users of the financial statements to evaluate the financial effects of the types of investment activities and the entity’s investments in subsidiaries, joint ventures, and associates. This includes disclosing the reasons why the entity’s separate financial statements are prepared if not mandatory by law, the method used to account for the investments listed above, and other relevant information such as the nature and extent of any significant restrictions on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans or advances.

5. Presentation and Classification:

Entities must clearly identify the financial statements as separate financial statements and distinguish them from the consolidated financial statements. Investments accounted for at cost or using the equity method should be classified as non-current assets.

Separate Financial Statements (Ind AS 27) Scope:

Scope Inclusions

• Entities Preparing Separate Financial Statements:

Ind AS 27 is applicable to all entities that prepare separate financial statements that comply with Indian Accounting Standards (Ind AS).

• Accounting for Investments:

The standard covers the accounting for investments in subsidiaries, joint ventures, and associates when an entity elects, or is required by law, to present separate financial statements.

• Choice of Accounting Method:

It allows entities to account for investments in subsidiaries, joint ventures, and associates either at cost, in accordance with Ind AS 109 “Financial Instruments,” or using the equity method as described in Ind AS 28 “Investments in Associates and Joint Ventures.”

Scope Exclusions

• Measurement of Investments in Consolidated Financial Statements:

The standard does not deal with the measurement of an entity’s investments in its consolidated financial statements, which is covered by Ind AS 110 and other relevant standards.

• Entities Not Required to Prepare Consolidated Financial Statements:

Entities that are not required to prepare consolidated financial statements may still be within the scope of Ind AS 27 when they prepare separate financial statements.

• Parent Exempt from Consolidation:

The standard also applies to a parent that is exempt from preparing consolidated financial statements by virtue of meeting certain criteria set out in Ind AS 110 but opts to prepare separate financial statements.

Preparation and Presentation of Separate financial Statement:

The preparation and presentation of separate financial statements under Ind AS 27, “Separate Financial Statements,” involve specific considerations to ensure that these statements provide relevant and reliable information about an entity’s investments in subsidiaries, joint ventures, and associates.

1. Objective of Separate Financial Statements

The objective is to present investments in subsidiaries, joint ventures, and associates in a manner that is useful to investors, creditors, and other users of the financial statements. Separate financial statements are prepared by an entity, apart from the consolidated financial statements, focusing specifically on the entity’s own financial information, including its investments in other entities.

2. Accounting Policies

Entities should apply consistent accounting policies in their separate financial statements and consolidated financial statements. However, investments in subsidiaries, joint ventures, and associates can be accounted for differently in separate financial statements compared to consolidated financial statements.

3. Accounting for Investments

In separate financial statements, investments in subsidiaries, joint ventures, and associates can be accounted for using one of the following methods:

• At Cost: Initially recognized at cost and subsequently adjusted for any post-acquisition changes in the entity’s share of net assets of the investee, impairments, and distributions received.
• In Accordance with Ind AS 109: Measured at fair value through profit or loss or through other comprehensive income, depending on the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets.
• Using the Equity Method: As described in Ind AS 28 “Investments in Associates and Joint Ventures,” recognizing the investor’s share of the profits or losses and other comprehensive income of the investee.

4. Presentation

Separate financial statements should be clearly identified and distinguished from other financial statements, such as consolidated financial statements. The statements should disclose:

• The fact that the statements are separate financial statements and the reasons why they are prepared if they are not required by law.
• The methods used to account for subsidiaries, joint ventures, and associates.
• Detailed information about the investments, including the list of subsidiaries, joint ventures, and associates, and reasons for not consolidating a subsidiary or not applying the equity method.

5. Disclosure

Disclosures in separate financial statements include, but are not limited to:

• The nature of the relationship with subsidiaries, joint ventures, and associates if not already apparent from other disclosures.
• The reasons why the entity does not prepare consolidated financial statements if applicable.
• A description of how the entity has accounted for its investments.

6. Preparation Basis

Separate financial statements should be prepared using the same measurement basis as the consolidated financial statements, except for the accounting of investments as permitted by Ind AS 27.

Financial Statements are structured records that convey the financial activities and conditions of a business entity. They consist of the balance sheet (statement of financial position), which shows assets, liabilities, and equity at a specific point in time; the income statement (profit and loss account), which reports revenue, expenses, and profit or loss over a period; the cash flow statement, detailing cash inflows and outflows across operating, investing, and financing activities; and the statement of changes in equity, highlighting movements in owners’ equity. Together, these documents provide stakeholders with essential insights into the entity’s financial performance and health.

The preparation of consolidated financial statements under Indian Accounting Standards (Ind AS) 103, which deals with Business Combinations, involves several crucial steps to ensure that the financial statements reflect the true and fair view of the combined entity’s financial position and performance. While Ind AS 103 primarily addresses how to account for business combinations, the preparation of consolidated financial statements also involves other relevant standards such as Ind AS 110, Consolidated Financial Statements.

Steps involved in the preparation of consolidated financial statements, with considerations from Ind AS 103:

1. Identify the Acquirer

Determine which of the combining entities is the acquirer, the entity that obtains control over another entity (the acquiree).

2. Determine the Acquisition Date

The acquisition date is the date on which the acquirer obtains control over the acquiree.

3. Recognize and Measure Identifiable Assets Acquired, Liabilities Assumed, and Any Non-controlling Interest in the Acquiree

Identify and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at their fair values at the acquisition date.

4. Recognize and Measure Goodwill or a Gain from a Bargain Purchase

Goodwill is recognized as the excess of (i) the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree, and in a business combination achieved in stages, the fair value of the acquirer’s previously held equity interest in the acquiree over (ii) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.

If the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree, and the fair value of the acquirer’s previously held interest in the acquiree (if any), a bargain purchase gain is recognized in profit or loss.

5. Account for the Consideration Transferred

Measure the consideration transferred for the acquiree at fair value, which may include assets transferred, liabilities incurred to the former owners of the acquiree, and equity interests issued by the acquirer.

6. Account for Acquisition-related Costs

Acquisition-related costs are expenses such as advisory, legal, accounting, valuation, and other professional or consulting fees. Under Ind AS 103, these costs are generally expensed as incurred, except for the costs to issue debt or equity securities, which are recognized in accordance with Ind AS 32 and Ind AS 109.

7. Consolidate the Financial Statements

After recognizing and measuring the above elements, consolidate the financial statements by combining the acquirer’s and acquiree’s financial statements. Eliminate intra-group balances, transactions, and unrealized profits or losses.

8. Disclosure

Provide disclosures that enable users of the financial statements to evaluate the nature and financial effect of the business combination, including detailed information about the acquisition, the amounts recognized for each class of assets and liabilities, goodwill, and the rationale for the transaction.

Capital profit

Steps in Recognizing a Gain from a Bargain Purchase (which could be conceptualized as “capital profit”):

1. Identify the Business Combination

Determine that a transaction or other event meets the definition of a business combination under Ind AS 103.

2. Determine the Acquisition Date

Identify the date on which the acquirer obtains control of the acquiree.

3. Measure the Total Consideration Transferred

Calculate the fair value of assets transferred, liabilities incurred, and equity interests issued by the acquirer.

4. Recognize and Measure the Identifiable Assets Acquired and Liabilities Assumed

Identify all the acquiree’s identifiable assets and liabilities and measure them at their acquisition-date fair values.

5. Measure Any Non-controlling Interest

Determine the fair value of the non-controlling interest in the acquiree, if any.

6. Calculate the Excess (Gain from a Bargain Purchase)

Subtract the aggregate of the consideration transferred, the amount of any non-controlling interest, and the fair value of any previously held equity interest in the acquiree from the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed.

If this calculation results in a positive number, it indicates a gain from a bargain purchase.

7. Review the Measurement

Before recognizing a gain, the acquirer must reassess whether it has correctly identified all of the acquiree’s assets and liabilities and accurately measured the consideration transferred and the assets and liabilities.

8. Recognize the Gain

If, after reassessment, the gain is confirmed, it is recognized in the profit or loss on the acquisition date.

Revenue profit:

To reflect the impact of a business combination on consolidated revenue and profit, you would follow the principles laid out in Ind AS 110, “Consolidated Financial Statements,” in addition to considering the effects of Ind AS 103 for any business combinations.

1. Identify the Reporting Date

Determine the financial reporting period for which the consolidated financial statements are being prepared.

2. Determine the Scope of Consolidation

Identify all subsidiaries, associates, and joint ventures that need to be included in the consolidated financial statements according to Ind AS 110 and other relevant standards.

3. Combine the Financial Statements

Add together the financial statements of the parent and its subsidiaries line by line, combining like items of assets, liabilities, equity, income, expenses, and cash flows.

4. Eliminate Intra-group Transactions and Balances

Remove all intra-group balances and transactions, including intra-group sales and profits, to ensure the consolidated revenue and profit figures represent only external transactions. This is crucial for accurately presenting consolidated revenue profit.

5. Adjust for Fair Value Adjustments

Make necessary adjustments to the carrying amounts of assets and liabilities in the acquiree’s financial statements to their fair values at the acquisition date. This may include adjustments to revenue-generating assets that could affect depreciation, amortization, and consequently, operational profit.

6. Account for Non-controlling Interests

Calculate and present the portion of equity and profit or loss attributable to non-controlling interests separately from the portion attributable to the owners of the parent.

7. Calculate Consolidated Revenue and Profit

After adjustments, calculate the total consolidated revenue by summing up the revenue figures from all group entities, post-elimination of intra-group transactions. Then, determine the consolidated profit by subtracting consolidated expenses from the consolidated revenue. This includes considering any impact from the acquisition, such as amortization of intangible assets identified at the acquisition date.

8. Report and Disclose

Prepare the consolidated income statement, presenting consolidated revenue, expenses, and profit. Include notes that disclose significant information about the business combination(s) under Ind AS 103, including its effect on the financial statements.

Related Party Transactions are an integral part of businesses in today’s world. The transactions between the related parties are generally conducted at negotiated terms and hence they must be disclosed. Additionally, for an investor, knowledge of related parties facilitates a more informed decision to invest in an entity. Also, for every reader of the financial statements accurate disclosure of all the related party relationships, transactions, and outstanding balances presents a correct picture of the risk and opportunities for an entity.

Related party transactions are the transfer of services or obligations, resources between a reporting entity, and related party irrespective of the fact that a price is charged.

The Government refers to government, government agencies, and similar bodies whether local, national, or international.

A government-related entity is an entity that is controlled, jointly controlled, or significantly influenced by the government.

Compensation includes all employment benefits such as short-term employment benefits, post-employment benefits, other long-term employer benefits, termination benefits, and share-based payments.

Related party is a person or entity that is related to the reporting entity that is an entity that prepares financial statements. A person or close family member is related to reporting entity if that individual:

• Has control or joint control over the reporting entity.
• Has significant influence over the reporting entity.

Is a member of the key personnel of the reporting entity or of the parent of the reporting entity.

A Close member of the family includes person’s children, spouse or domestic partner, brother, sister, father and mother, children of that person’s spouse or domestic partner and dependants of that person’s or person’s spouse or domestic partner. An entity is related to a reporting entity if the following conditions are met:

• Both the reporting entity and the entity belonging to the same group.
• An associate or joint venture of the other entity or of the same third party.
• The entity is a post-employment benefit plan for the reporting entity or any entity related to the reporting entity.
• The entity is controlled or jointly controlled by the person mentioned above or the person mentioned has significant influence over the entity.
• The entity or any member of the group provides key management personnel service to the reporting entity or parent of reporting entity.

The following information should be disclosed where control exists between the parties.

• Name of its parent and ultimate controlling party (if it is other than its parent); and
• Nature of the related party relationship.
• If neither the entity’s parent nor the ultimate controlling party prepares consolidated financial statements available for public use, the name of the next most senior parent (first parent in the group above the immediate parent that produces consolidated financial statements available for public) that does so shall also be disclosed.
• These two should be disclosed irrespective of whether or not there have been transactions between the related parties. Observe that this requirement is only when control exist between the parties. If there is NO Control, entity needs to disclose the information only when there is a transaction.

Related Party Transactions

If there have been transactions between related parties, disclose the nature of the related party relationship as well as information about the transactions and outstanding balances necessary for an understanding of the potential effect of the relationship on the financial statements. These disclosure would be made separately for each category of related parties and would include: [IAS 24.18-19]

• The amount of the transactions
• The amount of outstanding balances, including terms and conditions and guarantees
• Provisions for doubtful debts related to the amount of outstanding balances
• Expense recognised during the period in respect of bad or doubtful debts due from related parties.

Examples of the kinds of transactions that are disclosed if they are with a related party

• Purchases or Sales of Goods
• Purchases or Sales of Property and Other Assets
• Rendering or Receiving of Services
• Leases
• Transfers of Research and Development
• Transfers Under Licence Agreements
• Transfers Under Finance Arrangements (Including Loans and Equity Contributions in Cash or In Kind)
• Provision Of Guarantees or Collateral
• Commitments to do Something If a Particular Event Occurs or Does Not Occur in The Future, Including Executory Contracts (Recognised and Unrecognised)
• Settlement Of Liabilities on Behalf of The Entity or By the Entity on Behalf of Another Party

Consolidated financial statements are prepared in accordance with Ind AS 110, “Consolidated Financial Statements,” which requires an entity (the parent) that controls one or more other entities (subsidiaries) to present consolidated financial statements. Here is a comprehensive overview of the process and key considerations involved in preparing consolidated financial statements under Ind AS 110.

Objective of Ind AS 110

The objective is to provide financial information about the group as a single economic entity that represents the combined financial position, financial performance, and cash flows of the parent and its subsidiaries. This enables users of the financial statements to assess the financial health, performance, and cash flows of an entity and its subsidiaries as if they were a single entity.

Process of Preparing Consolidated Financial Statements

1. Identify the Parent-Subsidiary Relationship: The first step is to identify which entities are part of the group. This involves assessing whether the parent controls the subsidiary. Control exists when the parent has power over the subsidiary, is exposed to, or has rights to variable returns from its involvement with the subsidiary, and has the ability to use its power to affect its returns.
2. Prepare the Financial Statements of Parent and Subsidiaries: Before consolidation, ensure that the financial statements of the parent and each subsidiary are prepared using consistent accounting policies. If necessary, adjustments should be made to align accounting policies.
3. Consolidation Adjustments:
   • Combine Like Items: Add together like items of assets, liabilities, equity, income, expenses, and cash flows of the parent and its subsidiaries.
   • Eliminate Intra-group Balances and Transactions: Eliminate all intra-group balances, transactions, earnings, and cash flows to ensure the consolidated financial statements present only external transactions and balances.
   • Non-controlling Interests (NCI): Calculate and present non-controlling interests in the consolidated balance sheet and consolidated statement of profit and loss separately from the equity attributable to the owners of the parent.
4. Goodwill and Fair Value Adjustments:
   • Goodwill: Calculate goodwill as the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree, and, in a business combination achieved in stages, the fair value of the acquirer’s previously held equity interest in the acquiree, over the net identifiable assets acquired.
   • Fair Value Adjustments: Adjust the identifiable assets and liabilities of the subsidiary to their fair values at the acquisition date. Depreciate or amortize these adjustments as appropriate over their useful lives.
5. Consolidated Financial Statements Presentation:
   • Statement of Financial Position: Present a consolidated statement of financial position that includes the total assets and liabilities of the group, including non-controlling interests.
   • Statement of Profit and Loss: Present a consolidated statement of profit and loss that includes the total income and expenses of the group, distinguishing the profit or loss attributable to non-controlling interests and owners of the parent.
   • Statement of Changes in Equity: Show the changes in equity for the reporting period, including the amounts attributable to owners of the parent and non-controlling interests.
   • Statement of Cash Flows: Present a consolidated statement of cash flows, indicating the cash flows from operating, investing, and financing activities of the group as a whole.
6. Disclosures: Provide adequate disclosures to enable users to understand the basis of consolidation, the financial effects of acquisitions or disposals of subsidiaries, and the interests of the parent and non-controlling interests.

Problems on Consolidated Financial Statements (as per Ind AS 110)

Creating detailed problems on Consolidated Financial Statements as per Ind AS 110 (Consolidated Financial Statements) involves understanding the principles and mechanics behind consolidation. Below, I’ll outline a simplified problem scenario involving a parent company and its subsidiary to illustrate the consolidation process. This exercise will focus on key aspects such as calculating goodwill, non-controlling interest, and consolidating balances.

Problem Scenario:

ParentCo acquires 80% of SubsidiaryCo on January 1, 202X, for ₹100,000. On this date, SubsidiaryCo’s identifiable net assets are valued at ₹80,000. Assume all identifiable assets and liabilities of SubsidiaryCo are recorded at fair value except for an item of plant that had a fair value of ₹10,000 more than its carrying amount. The plant has a remaining useful life of 10 years. SubsidiaryCo’s financial statements at the acquisition date show equity comprising:

• Share Capital: ₹50,000
• Retained Earnings: ₹30,000

During the year, SubsidiaryCo earned a profit of ₹20,000 and declared dividends of ₹5,000. Assume ParentCo’s standalone financials show a profit of ₹60,000 and no transactions with SubsidiaryCo.

Objectives:

1. Calculate Goodwill.
2. Determine Non-controlling Interest (NCI) at acquisition.
3. Prepare consolidated financial statements extracts (equity and profit for the year).

Solution Steps:

1. Calculate Goodwill:

Goodwill = Consideration Transferred – (Share in Net Identifiable Assets of Subsidiary)

= ₹100,000 – (80% of (₹80,000 + ₹10,000 adjustment for plant))

= ₹100,000 – (80% of ₹90,000)

= ₹100,000 – ₹72,000

= ₹28,000

2. Determine Non-controlling Interest (NCI) at Acquisition:

NCI at Fair Value = NCI Percentage * (Net Identifiable Assets + Fair Value Adjustments)

= 20% * (₹80,000 + ₹10,000)

= 20% * ₹90,000

= ₹18,000

3. Prepare Consolidated Financial Statements Extracts:

• Consolidated Retained Earnings:

ParentCo’s Profit: ₹60,000

SubsidiaryCo’s Profit attributable to ParentCo (80% of ₹20,000): ₹16,000 Consolidated Retained Earnings: ParentCo’s Retained Earnings + Share in SubsidiaryCo’s Profit – Depreciation Adjustment – Dividends from SubsidiaryCo

= ₹60,000 + ₹16,000 – [(₹10,000 / 10 years) * 80%] – 0

= ₹76,000 – ₹800

= ₹75,200

• Consolidated Equity:

Share Capital (ParentCo): Assume ₹100,000

Retained Earnings: ₹75,200

NCI: ₹18,000 + (20% of SubsidiaryCo’s Profit – 20% of Dividends)

= ₹18,000 + (20% of ₹20,000) – (20% of ₹5,000)

= ₹18,000 + ₹4,000 – ₹1,000

= ₹21,000 Total Equity: ₹100,000 + ₹75,200 + ₹21,000

= ₹196,200

Notes:

• The depreciation adjustment for the fair value uplift of the plant (₹10,000 / 10 years = ₹1,000 per year) affects both the subsidiary’s profit attributable to the parent and the NCI.
• This simplified example doesn’t account for intra-group transactions, potential deferred taxes from fair value adjustments, or changes in the NCI post-acquisition.